One of the markers of any small business is the fact that, kind of like a teenager, your business will always have its hand out for cash. Indeed, there will never be a time when you won’t have a maintenance requirement, operational upgrade or business opportunity demanding precious capital.
But there is another petitioner for proceeds that is just as important as the others which, to its own disadvantage, is often less persistent. Nor does this applicant for assets typically demonstrate the same ROI urgency as do its competitors for cash. The classic small business financial stepchild is a formal retirement plan.
Alas, there is another disadvantage: While the operating options mentioned above can be funded from a number of sources – investment, debt, retained earnings and even cash flow – retirement contributions are primarily funded by excess retained earnings. Excess means profits you’ve determined the business can do without and still fund growth. For a small business, that number too often compares in value to the proverbial widow’s mite.
And, yes, it’s true that most retirement funding is tax deductible; but, as your CPA will tell you, you’re not in the 100% tax bracket. That means the lion’s share of retirement funds is capital that could have gone to something that will always seems sexier.
Consequently, two difficult things have to happen before a small business owner actually funds a retirement plan: 1) Enough retained earnings have to be generated by the company; and 2) Someone has to tell the “teenager” it can’t have everything it wants this year.
We wanted to know how small businesses were managing these two challenges, so we asked our audience what they were doing about retirement. Forty-four percent said they contributed to a retirement plan each year. The other 56% were not funding a retirement plan, citing reasons ranging from not having the spare capital to the weak economy.
As difficult as it is to master the two steps above, 44% is not surprising. But it’s a long way from acceptable.
The good news, as mentioned earlier, is there are many tax deductible retirement options available to fit any small business owner’s financial situation, from the very simple to the not so much. Your seemingly impossible mission, should you decide to accept it, is to find the discipline to budget for and execute the funding of a retirement plan that will take care of you when your business cannot.